Markets ended last week with a bang, and not in a good way, as the S&P 500 (down 1.45%), Russell 2000 (down 2.95%), and Russell Microcap (down 3.75%) showed the strain of multiple issues. While the S&P 500 (up 0.9%) and Russell 2000 (up 0.9%) are still in positive territory year-to-date, the Russell Microcap (down 2.5%) fell into negative territory.
Falling markets are generally an interesting time to check out deeper value screens, as a lowering tide generally reveals more potential treasures. One technique I've used for years is based on Benjamin Graham's "Stocks for the Defensive Investor" (from his 1949 masterpiece The Intelligent Investor), and is seeing its ranks grow somewhat.
Currently, 16 names make the cut, including three new ones since my December column.
Titanium dioxide company Kronos Worldwide (KRO) makes its debut appearance following a worse-than-expected fourth-quarter loss (18 cents per share loss versus 7 cents loss consensus). Earnings for the full year were 90 cents. KRO, which is the epitome of a cyclical business, has fallen 22% over the past week. The shares currently trade at 13 and 8 times 2023 and 2024 consensus estimates, respectively. The company ended the quarter with nearly $330 million in cash and $425 million in debt, and currently yields 8.3%.
Steel and metals recycler Steel Dynamics (STLD) debuts as the second largest current qualifier ($21 billion market cap). STLD trades at 10x and 16x 2023 and 2024 consensus estimates, respectively. Last month, the company recently raised its quarterly dividend 25% to 42.5 cents, which equates to a 1.41% yield. The shares fell 6% Friday.
Also making the cut is agricultural and transportation company Seaboard (SEB) , which is not a widely known name due to its high share price and low volume -- the stock closed at $3,758 on Friday, and has average trading volume of less than 1000 shares/day.
Other current qualifiers in order of market cap (largest to smallest) include Nucor (NU) , Reliance Steel (RS) , Commercial Metals (CMC) , UFP Industries (UFPI) , Mueller Industries (MLI) , Encore Wire (WIRE) , Winnebago (WGO) , Standard Motor Products (SMP) , Johnson Outdoors (JOUT) , Resource Connection (RGP) , Preformed Line Products (PLPC) , Insteel Industries (IIN) , and AMCON Distributing Co (DIT) .
Since my December column, Huntsman (HUN) , Korn Ferry (KFY) , Worthington Industries (WOR) have left the list.
See below for the screening criteria:
- Adequate size. A company must have at least $500 million in sales on a trailing 12-month basis. (Graham used a $100 million minimum and at least $50 million in total assets.)
- Strong financial condition. A company must have a current ratio (current assets divided by current liabilities) of at least 2.0. It also must have less long-term debt than working capital.
- Earnings stability. A business must have had positive earnings for the past seven years. (Graham used a 10-year minimum.)
- Dividend record. The company must have paid a dividend for the past seven years. (Graham required 20 years.)
- Earnings growth. Earnings must have expanded by at least 3% compounded annually over the past seven years. (Graham mandated a one-third gain in earnings per share over the latest 10 years.)
- Moderate price-to-earnings (P/E) ratio. A stock must have had a 15 or lower average P/E over the past three years.
- Moderate ratio of price to assets. The price-to-earnings ratio times the price-to-book value ratio must be less than 22.5.
- No utilities or retailers
